Mining Town Investment Woes

Louis Christopher of SQM Research has spent some time recently highlighting that, since the middle to 2012, a number of mining towns are going through a property downturn.

It’s something both he and I discussed on Commonwealth Bank’s Living Space blog here:

“A number of mining towns around the country are in the middle of a downswing,” says SQM managing director, Louis Christopher.

It started in the second half of 2012 and as time has gone on conditions in these real estate markets have progressively got worse. There are examples where rents and house prices have fallen by 30 per cent-plus.”

There are a number of reasons why this might be the case, though with mining towns you often have to treat them on a case by case basis.

As the labour-intensive construction phase of the mining bboom has now peaked, some mining towns have entered their transition phase.

The other thing to watch out for is towns where employers take matters in to their own hand and begin to provide their own accommodation for FIFO workers.

On other occasions, land is released for new suburbs and developments.

“One of the factors behind this is that Australia’s mining boom is moving into a new phase, says Pete Wargent, co-founder of AllenWargent property buyers, and a former Group Financial Controller for an ASX-listed mining company.

“The construction phase of the mining boom, which has been running for the last decade, is getting close to its peak,” Wargent says. “That’s the labour-intensive phase of the mining boom.

“The next phase of the boom is the production phase.” And with that, comes unemployment.

“It takes a lot more workers to construct a mine than it does to operate one,” Wargent says. Once a mine construction has finished, many workers simply leave town.

A second contributing factor has been the increase in the supply of new real estate in many mining towns to cater for the temporarily higher demand.”

Mining towns which have recently hit upon problems include Karratha in the Pilbara, while former star performer Gladstone now faces issues of its own, as noted by Christopher in the Living Space article.

Morwell

The latest mining town to fall upon disastrous times is the coal-mining town of Morwell in Victoria, where a catastrophic mine fire has been burning for three weeks.[sam id=41 codes=’true’]

Authorities are hoping to have the mine fire under control during the next 10 days.

With inhabitants complaining that they are unable to breathe or sleep, authorities are considering evacuating the entire town’s population, although health officers have suggested that smoke levels are not at high enough risk levels to date for a full evacuation.

Morwell is a small town around of around 14,000 population, located around 150km from Melbourne, but while certain commodity prices have taken a hit of late, nobody could have foreseen such a terrible mining accident.

With buyers nowhere to be found, tragically house prices have been reported to have fallen by as much as $25,000 (~17%) in only a few months.

Morwell was tipped as a property hotspot for investors as recently as a year ago (the most bitter of ironies for residents, for its fresh country air), but in semi-rural areas that are exposed to mining, the potential for fast returns can sometimes come with an elevated risk in the short-term.

On the plus side, Toowoomba and houses in western Sydney both look to have fine prospects in 2014, which just goes to highlight the merits of diversifying investment risk.

I do own some regional properties, but demographers tell us that by 2060, the population will have boomed to 40 million, the overwhelming majority of whom will live in the major cities.

Two-thirds of Australians are expected to live in just four main capital cities by 2060.

14 million of the 18.4 million migrants are expected to move to Sydney, Melbourne, Brisbane and Perth alone

For these reasons, I’ve always considered supply-constrained suburbs in capital cities such as Sydney and London to be the lowest risk in property investment and so built my property investment plan around that.

For the sake of the mining community, and that of the town’s residents, let’s hope the blaze is brought under control in the next fortnight.

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Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog

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